Wednesday, November 19, 2008

Imagine that there is a particular concert that you want to go to with a friend of yours. The concert is expected to be very popular, and concert goers can only purchase tickets at a particular location. So, you go to that location with enough money to buy the tickets, only to discover that the line is already extremely long. Still, you get in line. When the ticket stand opens, the line starts to move, and, before you get to the ticket stand, they hang a “Sold Out” sign on the window and close up the stand.

Your next option is to go onto the computer and see who is selling tickets. You see that the tickets are being offered for $1000 each on-line. That’s $2000 for you and your friend. That’s too expensive, you decide, and you decline to buy the tickets.

Then, you pass somebody on the street who is visibly upset. Perhaps he had just had a fight with his girlfriend or something. He puts two concert tickets in your hand and says, “Do whatever you want with them,” and walks off.

Do you then go to the concert?

Most people answer, “Yes.”

However, traditional decision theory suggests that this is the wrong answer.

When you went online to buy the tickets and saw what they were selling for, you decided that $2000 was worth more to you than 2 tickets. Given a decision between keeping $2000 and exchanging it for two tickets, you selected to keep the $2000.

Here, again, you are put in a position where you can decide between having two tickets to the concert and having $2000. You know that you could go online and put the tickets up for sale and get $2000 for them. Yet, most people choose the tickets (and going to the concert) over the $2000 they could otherwise get.

These are the very same people who, earlier, choose to have $2000 rather than the tickets.

What is going on here?

If you take the model that I have been defending in this blog – that people always choose that which fulfills the most and strongest of their desires, given their beliefs – then this type of decision making is a problem. Why is it that the state that “I have $2000” the one that fulfills the most and strongest desires in the first case, but the state, “I have 2 tickets to the concert” the state that fulfills the most and strongest desires in the second?

Do these types of examples disprove the type of action theory I have been defending?

Probably.

Inertia in Decision Making

What these types of situations argue for is that our decision making has a certain type of inertia – and that it takes a extra energy, in a sense – an extra benefit - to overcome that inertia and to get us to move along a different course than the one we are on.

In the first case, where a person has the option of buying tickets online for $1000 each, the agent would have to spend $2000 that the agent did not plan to spend. Inertia says to keep the money where it is and forego the concert.

In the second case, where one is suddenly given the tickets, inertia says to go to the concert. This is what the agent had already planned – before the “sold out” sign put a roadblock across those plans. When suddenly given a pair of tickets, those plans become viable again, so the agent goes to the concert.

What this tells us more generally is that people make plans and they have some sort of inclination or tendency to follow those plans to their completion. These plans create barriers to anything that would result in a change of course, that would result in changing those plans.

Furthermore, I suspect that observations would show that people have different degrees of reluctance to changing their plans. Some will scrap a plan the instant they see a benefit in doing so, while others will knowingly follow a plan to its painful end even when they fully see the disaster that waits for them. For these people, the costs of leaving the channel that is their plan is greater than the cost of the cost of the disaster, at least in present terms.

The Belief-Desire Model

We can actually incorporate this phenomena into the belief-desire model that I generally defend in this blog. We can incorporate it by saying that people have an aversion to altering a plan. This aversion is stronger in some people and weaker in others. It is probably malleable (subject to social forces), meaning that it makes sense for us to argue, “To what degree should people be averse to altering a plan?”

There is a moral argument to be made to promoting some aversion to changing plans at the last minute. People who stick to their plans are easier to predict. Because they are easier to predict, this makes it easier for others to make their plans. I create a number of plans every day that depend on what other people do. It is far easier for me to create successful plans when I am able to reliably predict the actions of others.

On the other hand, too much devotion to a plan generates the type of problems I wrote about above. It means that the agent will not change course even when the current course is heading towards a disaster. The aversion that we have to those disastrous states argues for promoting in people some disposition to consider where they are going, and to change course.

This concept of inertia in decision making is relevant to a great many of our social policies.

The problem with global warming is that a great many of our plans carry with them a certain amount of inertia. This inertia tells us to keep to our old habits with respect to driving, heating our homes, and our use of electricity. It takes more than the fact that there are benefits to be captured by altering the way we live. Those benefits have to be so much greater that they can overcome inertia – that they can overcome the aversion to changing plans.

Bigotry and prejudice are also subject to inertia. The difficulty in getting institutions to give up on slavery, segregation, or ‘traditional marriage’, on rituals involving pledges to ‘under God’, all rest with the fact that those ‘traditions had inertia, and inertia favors the preservation of traditions.

In fact, we can easily fit the social concept of a ‘tradition’ into this discussion of the existence of and the value of inertia in decision making. I argued above that there are certain benefits to having people stuck in a plan, to a certain extent; this makes it easier for people to make plans. One way to promote this virtue of sticking with a plan is to attach the term ‘tradition’ to certain plans, and to promote a desire to preserve tradition (or an aversion to violating traditions).

The value . . . the virtue . . . of tradition (as captured in some conservative values) does have some merit. The value . . . the virtue . . . of change also has merit where tradition and keeping to a path is destructive of the self and others. It is permissible to argue to preserve tradition for tradition’s sake as long as the cost of doing so is not so great. However, the value of preserving tradition – in the minds of a good person – should be weaker than the aversion to causing great harm to others. When these values come into conflict, the desire to preserve tradition should give way to the desire to avoid doing harm.

Conclusion

In general, our decisions are grounded at least somewhat on the preservation of plans – the preservation of traditions. To the degree that we can promote in others an aversion to changing plans or shunning tradition, to that degree they become more predictable, and we can better fulfill our own goals (including our own aversions to violating certain traditions). The liberal is wrong to dismiss too easily the value of tradition.

At the same time, the conservative is wrong to attach too much value to tradition. The value of tradition is that it adds certain efficiencies to our daily decision making. It is not some sacred, inviolable law that must always be followed regardless of the consequences (the harm done to others).

There is a balance here to be maintained, and it will often be difficult to know where that balance should be struck. These, then, are circumstances where different people can disagree without mocking or denigrating others who they disagree with, within certain limits.

14 comments:

Doug S.
said...

[nitpick]Reselling tickets is a pain in the neck, and often illegal. As a practical matter, it's a lot easier to take those tickets and go to the concert, than to sell them and capture their $2000 value as cash.

Also, gaining $2000 and avoiding a loss of $2000 you already have are not at all the same thing. It doesn't make you irrational if you prefer "$2000 and no tickets" to "tickets and no $2000" while still preferring "tickets and $2000" to "no tickets and $4000".[/nitpick]

Any set of desires should, in principle, be equivalent to some utility function or other...

Yes I somewhat agree with Doug S. and can add another alternative too.

You have already invested more time and effort with zero return - until given the tickets - than your friend. (This effort may be discountable - if this a cost of getting your friend to come out with you e.g. on a date, or not). Anyway another option is:

You could keep one and go by yourself and either a) sell the other ticket and get $1000 or b) get your friend to pay you $1000 to attend.

Is a justification need to do chose this option? Is the previously unfulfilled effort such a justification or irrelevant?

Plus you are delving into the clash between rational expectation theory of classical economics and behavioural finance which incorporates knowledge of heuristics and biases from cognitive psychology.

Within that area for example you have Gigerenzer with the "Don't Break Ranks" and "choose the default" heuristics, which shows how arguments from tradition can be supported utilising "inertia" - moral or not.

Gigerenzer - as opposed to Tversky et al. also shows how such biases can be overcome (e.g change the default option on the "don't break ranks" heuristic to break "inertia"). (When I have time I intend to explore these type of topics on my own blog from a DU perspective).

First, I mentioned that the tickets were being bought and sold openly online specifically to indicate that there are no legal problems with buying and selling tickets. It's an open market and, quite easily done.

What you are talking about are what economists call transaction costs - and the transaction costs for selling a ticket are no higher than the transaction costs for buying a ticket.

Second, the point of the article was to argue that gaining $2000 and avoiding the loss of $2000 are not the same thing. The article goes on to explain the difference - the fact that a person has already formed plans around the $2000 he has, but not the unexpected tickets (or $2000) he receives.

Martino

Thank you for the referrals.

I would like to read what you say when you explore these types of topics from a DU perspective.

I am not sure if I see anything in what you wrote that conflicts with this posting.

Well, I'm not sure it's a better explanation, but the concept of marginal utility would seem to apply: the utility value of each additional dollar is less than the previous one, because I need my first dollars for the very important things (life saving ones), then can allocate my wealth to decreasingly critical things, until I reach the leisure spending.

So let's say that I think I can spend my most recent dollars on a concert ticket. However, when the price increases to $1000, as I could need the difference for other purposes, so the new price is no longer interesting (the utility value of the difference is worth more to me than a ticket). But then I get the tickets for free. Should I sell them? Not if I think that the tickets are worth more than $1000 I do not have yet. After all, I am already at the level of leisure spending. What would I do with the saved money from the tickets and the additional $1000? Buy more ... what? I already have what I need, except a concert ticket.

So, in other words, the tickets are worth more than $1000 I do not have, but less than $1000 I already have but might need for other purposes.

Alonzo: I believe most of your comments are coming from those who would also debate "Gulliver's Travels" without recognizing the allegory. Perhaps another posting on "How tradition creates memes that may adversely influence values or decisions!" would be in order.

You need to compare this situation with the alternative version that instead of being given the tickets for free you are given $2000 (say, a lottery win). With this unexpected windfall I think many people (not all) would consider buying the overpriced tickets from the online scalper after all.

When considering a deal you don't just take into account your appraisal of the monetary worth of a commodity, but also the affordability. Ever wonder why pubs are more crowded at the beginning of the month (after payday) than towards the end? People do not re-evaluate the worth of getting high, they reconsider affordability.

And even if the online re-sale of the tickets is 100% legal you might still feel it is not right to charge or pay more than the original price for a ticket - an argument that reinforces both the decision against initially buying the tickets online and the decision against later selling the tickets online.

Marginal utility (or diminishing marginal returns) certainly explains a part of the effect. The second $1000 is simply worth less than the first $1000. The value of the first $1000 may well be greater then the price of the ticket, while the value of the second $1000 is less than the value of the ticket.

However, I do not think that marginal utility would be so precisely balanced in such a large number of cases. The percentage of people who agree to go to the concert if given tickets - who would not buy the tickets for $1000 each but also not sell them for $1000 each - is extremely high. In fact, I predict that a vast majority of readers would go to the concert under the conditions described.

I do not think that marginal utility accounts for such a high percentage.

Whereas the concept of "inertia" or "plans" predicts that people will continue the course they are on by default, and it takes an unusually high benefit to overcome the aversion to changing paths, explains why people stay on the same path. They do not convert cash into tickets when they have cash, and they do not convert tickets into cash when they have tickets.

Note that this fact is actually used (to the advantage of some companies and policies) in order to bring about desired results.

There is a plan to have companies enroll employees into retirement plans as a matter of defaut - because once a person is enrolled in a plan they will stay in a plan.

Campus groups, unions, and other organizations routinely argue for an "opt out" policy rather than an "opt in" policy. That is, they opt you into paying an $X monthly fee for their service, which you can get out of simply by sending a letter saying, "Get me out of this." But a lot of people do not do this. By "inertia" they continue to pay the fee.

Businesses that send you a shipment every month where you can decide whether to keep the product or send it back profit from this disposition. People who have the product keep it (and can be billed for it).

Your last post presents a few specific examples of how "choose the default" heuristic which can be abused by business.

What springs to mind occurred over certain types of spamming - the opt-in/opt-out default debate for online email shots and passing of email lists to third parties: With huge growth of the internet many n00bies were taken advantage of, as they assume the defaults were recommendations in their own interest - that is how the heuristic works - not, as it happened, the defaults being in the interest of the business obtaining the email address.

None of this is meant to contradict the underlying thrust of your post, just to illuminate how it works. Since you brought up opt-in/opt-out yourself I think you would already agree.

Finally I do disagree with your single paragraph "probably" maybe "apparently" is better? :-) ;-)

Note that this fact is actually used (to the advantage of some companies and policies) in order to bring about desired results.

This is what Thaler and Sunstein describe in their book "Nudge".

Campus groups, unions, and other organizations routinely argue for an "opt out" policy rather than an "opt in" policy.

That's exactly the business model of the catholic and protestant churches here in Germany - where the state collects "church tax" for the churches from everybody who was baptized as a child (still the overwhelming majority because of, well, tradition(!) ). So people automatically pay their "membership dues" until they choose to opt out (and pay an "unsubsribe fee").

I might have been unclear in one of my previous replies: I agree with your view on traditions and inertia of plans, but I disagree about the economic scanario you chose supporting your claim, since your interpretation is not cogent (marginal utility, affordability).

You have two related arguments that do not quite work together, the latter "inertia/plan" one is the more ethically important, regardless of the soundness of the former "ticket/economics" argument and its use to support the overall conclusion.

I think it does show that people do NOT always choose that which fulfills the most and strongest of their desires, given their beliefs.

Free will does not mean that desires and beliefs don't count: on the contrary, they are certainly the deciding factors, but the trouble is that there is always some kind of vacillation: there is often no way of knowing the strongest desire even in yourself, and therefore the best choice.

The same person may suddenly decide to put them up for sale after all, or flog them outside the venue, or go along enthusiastically. There is no way of knowing this beforehand by any kind of calculus because concerts and money are not the same kinds of things.

About Me

When I was in high school, I decided that I wanted to leave the world better off than it would have been if I had not existed. This started a quest, through 12 years of college and on to today, to try to discover what a "better" world consists of. I have written a book describing that journey that you can find on my website. In this blog, I will keep track of the issues I have confronted since then.